In their new financial model report, Fitch analysts noted that housing prices in Canada have continued to climb since 1996 and, while small corrections have occurred, these prices have risen without the support of underlying financial fundamentals.

For that reason, the ratings agency suggests that the overvaluation of real estate in certain provinces is in the double digits. For instance:

• Ontario is overvalued by 21%
• Alberta by 15%
• British Columbia by 26%, and
• Quebec by 26%

Still, Fitch analysts don’t believe the overpriced real estate markets will result in price declines that equal or exceed the overvaluation rates.

“Actual nominal [price] declines could range from the low single digits for Alberta, up to more than 15% for B.C. and Quebec.”

The key: these declines will occur over the next several years. More importantly, the price decrease will be closer to 10% of home prices not 20%, explain Fitch analysts.

Of course, certain markets have already felt the pinch. In Alberta, low crude oil prices in 2008 forced a price correction. In B.C., there was a 29% drop in year-over-year sales in February—signalling a cooling in what is considered Canada’s most overvalued market.

For buyers willing to sit out another five or so years this could mean a drop in home prices. For example, a home listed for $450,000, today, could drop in cost to $405,000 within the next five years.

Good news for the patient homebuyer, but the decision to wait and buy should also factor in potential rising interest rates as well as job security and economic growth. If discounted five-year posted interest rates go up to 5% in the next five years—an increase that’s not out of the realm of possibility—then you would pay $2,249 per month (based on a 5% five-year fixed rate for a 25 year amortization on a $405,000 home, with 5% down). If you bought now, you’d be paying $2,025 per month (based on a 3% five-year fixed rate mortgage for a 25 year amortization on a $450,000 home, with 5% down).

In 2010, when it seemed like another economic collapse was imminent, the spread between variable and fixed rate mortgages was about 170 basis points. Today’s it’s closer to 30. In fact, a friend of mine recently got a five-year fixed rate mortgage for 2.89%, which is a mere 29 basis points above a variable rate. Such deals are easy to find across the country.

Mark Fidgett, a Vancouver-based mortgage broker, believes variable mortgages only make sense when there is at least a one-percentage point spread to fix rate mortgages. The danger, he explains, is when rates rise. If the Bank of Canada increases the prime rate by, say, 25 basis points then variable rate mortgages will also increase by that much.

So if that happens you’ll simply lock in to a fixed rate then, right? Well, by that time, these incredibly low deals on fixed mortgages will be long gone. Robert McLister, editor of the Canadian Mortgage Trends website, explains that fixed rates are based on bond yields, which typically rise in advance of the prime rate. “You get people with variable rates thinking they’ll lock in at the right time, but nine times out of 10 they’re late,” he says. “Bond yields have already moved and so has the fixed rate.”

Of course, you can take the view that rates won’t rise for years, as one expert did in Carrick’s story. Then, technically, variable will save you money. But like investing, timing the marketing can be dangerous. No one knows for sure how the economy will do. If the economy performs better than expected, the BoC could raise rates earlier than expected. While it’s unlikely—some argue the BoC will wait for the U.S. Federal Reserve to increase its rates in 2015—but you never know.

Even if rates don’t rise until 2015 it’s impossible to know what fixed rates will be at that point. Fidgett thinks that we’ll see fixed rates around the 3.25% to 3.5% range for the next year, but it’s not unreasonable to think that rates will get back to 5% in the not to distant future. “It wasn’t long ago that those were great rates,” he says.

One argument variable rate fans make is that over time, they tend to save people money. But it’s hard to make that case when rates have little or no room left to fall. “The odds of variable outperforming are far less then they have ever been in the past,” says McLister.

There is one good reason to get a variable rate today: if you’re planning to sell a house within five years. Breaking a fixed-rate mortgage can be costly since you either have to pay an interest rate differential or a three month interest rate penalty, whichever is higher. It’s likely you’ll end up having to pay that differential, which is far more expensive than the three-month interest rate hit. Variable rate mortgages do not have the interest rate differential fee, only the three-month interest rate penalty. So, if you plan to sell a house within the three or four years of buying it, then consider a variable rate.

Otherwise, it’s hard to make an argument for the variable rate mortgage. You wouldn’t buy a stock strictly for a 4% yield, when a Government bond can pay you the same—it just doesn’t make sense to take on added risk when you can make as much from a more stable investment. It’s the same thing with mortgages. There’s simply not enough reward to put your monthly payments at risk of a rate increase. Plus, who knows if we’ll see fixed-rates this low ever again.

2. We may raise rates just to remind you they can go up. When the Bank of Canada says “some modest withdrawal of the present considerable monetary policy stimulus may become appropriate,” what they are really saying is that they are not going to cut rates. It’s also telling Canadians to be forewarned: rates can go up, and the BoC could raise them occasionally just to prove it, notes Gregory.

3. The BoC is more worried about the economy than it lets on. The housing sector is fading and the government sector is in retreat, leaving the business sector to provide all the growth, says Capital Economics’ David Madani. Now they’re worried about a sudden drop in home prices. It’s not like the BoC can cut rates to prop prices up if things go south, Madani says.

4. We’ve got your back. The U.S. Federal Reserve has already dished out two stimulus programs and is now on to a third one, Gregory reminds us. The Fed is saying, “You may worry about the fiscal cliff, the crisis in Europe and slowing China, but don’t worry about monetary policy. We’ve got your back. You can have confidence growth won’t stall, and we’re going to throw the kitchen sink at it to prove it.”

5. We’re making it up as we go. Central banks are in a bit of a bind, says Madani. “We are in a highly experimental world right now.” Central banks have never been in this position before. Normally they would inject life in the economy by cutting rates but that hasn’t been enough, so they keep trying new measures to see what works.